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Detroit emergency manager pleads for state funds

DETROIT -- Detroit's emergency manager on Tuesday pleaded with state lawmakers to kick in $195 million in upfront cash as part of a grand bargain to help resolve the city's historic Chapter 9 bankruptcy.

DETROIT -- Detroit's emergency manager on Tuesday pleaded with state lawmakers to kick in $195 million in upfront cash as part of a grand bargain to help resolve the city's historic Chapter 9 bankruptcy — while some of city's largest creditors devised strategies to block the fund meant to shore up pensions and protect the city's art museum from having to sell its treasures to pay off debt.

"We have what we think is a reasonable plan, but to put it bluntly, we need your money," emergency manager Kevyn Orr testified before the newly created state House Committee on Detroit's Recovery and Michigan's Future. "If we don't get the state settlement, our creditors likely would not approve the plan."

Orr wants the state to contribute the lump sum as part of an $816 million grand bargain fund that is the centerpiece of his restructuring plan because it limits cuts to pensioners and protects art by injecting new money into the situation.

A group of local and national foundations would contribute more than $366 million to the fund, but only if a sweeping settlement is reached and pensioners and others agree not to sue. The Detroit Institute of Arts, for its part, has agreed to raise $100 million.

The fund has drawn support from the city's major retiree groups. But financial creditors, including bond insurers and banks owed hundreds of millions of dollars are trying to kill the deal, arguing in court filings that the city should consider selling the art masterpieces. They say the current plan unfairly favors pensioners over city debt holders and investors.

The legal fight has emerged as one of the most important hurdles to a quick resolution of Detroit's bankruptcy. The conflict will culminate in a massive trial starting in July when U.S. Bankruptcy Judge Steven Rhodes will decide the fate of the largest municipal bankruptcy in U.S. history.

"I continue to believe that financial creditors have viable arguments, and while the push to sell the art would probably subside if the bargain were bigger and there were more seats at the table to receive the money, I don't think it's a slam dunk one way or the other," said Melissa Jacoby, a University of North Carolina-Chapel Hill bankruptcy law professor who has been closely tracking the case.

The Detroit Free Press first reported Tuesday that the philanthropic foundations of General Motors, Ford and Chrysler are all considering donations to the DIA that could collectively total tens of millions of dollars. The Free Press also confirmed that DTE Energy, Quicken Loans billionaire Dan Gilbert's companies and the Los Angeles-based Getty Foundation are also weighing contributions to the DIA to help bring the grand bargain to the finish line. Representatives from the companies declined to talk amounts or say when they would make their decisions.

Pensions at risk

The House committee's first hearing Tuesday began the process of considering an 11-bill package that will govern the state's potential contribution to the settlement.

The bills would attach some controversial conditions to the funding, including the creation of an oversight commission that would retain authority over the city's spending, borrowing and contracts for 20 years and the requirement that new Detroit employees receive 401(k)-style retirement plans instead of traditional defined-benefit pensions.

As part of the grand bargain funding from lawmakers and pledges from foundations, Detroit retirees would have to relinquish their right to sue the state over pension cuts in exchange for better treatment in the city's restructuring plan.

Civilian retirees would get 4.5% pension cuts and no more annual cost-of-living adjustment increases if they vote "yes" on the city's restructuring plan and Lansing lawmakers also approve the state's contribution. Police and fire retirees would get no monthly pension cuts and would accept a decrease in COLA from 2.25% to about 1%.

If the state fails to contribute $195 million upfront — the statistical equivalent of $350 million spread out over 20 years — Detroit would lose the $366 million pledged by charitable foundations and the $100 million in donations the DIA is working to raise.

Without the grand bargain cash, some civilian pensioners could endure cuts of up to 40% when including the impact of the city's plan to claw back excessive annuity payments over the last 10 years.

"Without this settlement, we're going to have to go back to the drawing board," Orr testified. "And for some people, it would be catastrophic."

A typical retiree with a $20,000 a year pension would drop to $12,000 a year without the state's participation. Retired police and firefighters, who don't get Social Security to supplement their retirement, would drop from $35,000 to about $20,000 a year, Orr said.

Most unsecured financial creditors would get about 10 cents on the dollar under Orr's current proposal, compared with as much as 60 cents on the dollar for civilian pensions.

Pay now or pay later

For their part, state legislators on the Detroit committee signaled a willingness to consider their portion of the city's bankruptcy settlement.

"Detroit is a legal subdivision of the state. The state has a responsibility. It's an inseparable part of the state," said Republican state Rep. John Walsh, the chairman of the committee and a supporter of the deal. "This is a once-in-a-lifetime opportunity to fix Detroit and do it right. We can pay now and do it right, or pay later."

Walsh said if the settlement doesn't happen and cuts become more severe to pensioners, many would fall into the social safety net and end up costing the state $275 million. Some lawmakers, however, remain uncommitted to the package — which would pay the city with money from the state's rainy day fund in one lump sum. That fund would be paid back over 20 years with proceeds from a tobacco settlement the state receives each year.

Republican state Rep. Earl Poleski said he needs to hear more about the specific bills before he decides whether to support the cash infusion. "All of us want to make sure Detroit emerges from bankruptcy sooner rather than later, but only in a responsible and reasonable way that protects the city and the rest of the state. ... We'll either be satisfied or we won't."

How the state decides to pay back the rainy day fund is irrelevant to the bankruptcy proceedings, said Orr. "Once we get the money in our hot little hands, how you repay yourself is up to you."

The bills won't get an easy pass from Democrats or employee unions. Democratic state Rep. Thomas Stallworth said he doesn't mind oversight from the state.

"But the magnitude of the strings are a bit hard to swallow," he said.

Lisa Howze, the director of governmental affairs for the city and a former state representative, said her boss, Detroit Mayor Mike Duggan, is concerned about the level of oversight contained in the bills.

"He'd like the ability to demonstrate that we're meeting the metrics and having some of that oversight lessened over time," she said. "Self determination is the goal, and that's the path that Detroit wants to be on."